August 05, 2007

posted by Daniel J. Solove

Readers might also be interested in a discussion of this held over at the Legal Ethics Forum: http://legalethicsforum.typepad.com/blog/2007/07/scott-turow-on-.html#comments

I'll quibble with 3 and 4. The productive lawyer doesn't finish in half the time and then have nothing to do. The productive lawyer finishes in half the time, and then does additional work, including picking up unfinished assignments from the inefficient lawyers. Such things do, in fact, get noticed at law firms.

Lawyers at big firms must work insane hours to compete.

Transactional lawyers may want to insist on a "cut of the deal," like bankers, rather than accepting hourly wages. I have a sense the divergence of incomes between the two has a lot to do with the bankers' ability to demand a cut.

As for litigators, I don't really know. The whole debate reminds me of a raging dispute on doctors' compensation. Pay them by procedure, and they have an incentive to intervene unnecessarily. Pay them a salary, and there's an incentive to knock off early and play golf. Pay them for "results," and there's an incentive to select only the healthiest patients. It seems like a mix of compensation schemes is necessary.

To follow up on Michael's point, there's factors at work that mitigate points 2-4. I felt under constant pressure while in private practice to keep hours spent on individual matters *down*, pressure that came from clients and was passed on by partners. This was at the same time that there was pressure to keep monthly and yearly billable hours spent on all matters high. Inefficient lawyers do not do so well in that situation.

It's true that creating pressure to keep hours down requires companies to carefully scrutinize their legal bills, and to be aggressive when descriptions are vague or the number of hours seems excessive. That's a burden on the client. But I think many corporate clients are taking that burden on.

Can you illuminate, for the non-lawyers present, what constitutes a "billable hour", as opposed to a regular working hour? Because 2000 hours a year is 40 hours a week witha 2 week vacation. A horrible fate, to be sure, but pretty much baseline standard for most professionals these days.

John -- Billable hours involve billing clients per hour worked as opposed to another fee structure. For example, if a lawyer were to do your will, that lawyer could charge you by the hour or a flat rate depending upon the nature and complexity of the will being drafted. Billable hours will be much less than regular working hours, since there will be many times of the day where clients aren't being billed (firm functions, lunch, bathroom breaks, etc.). I don't have good statistics on ratios, but working hours exceeds billable hours. So a 40 hours billed per week might mean 50 or 60 hours worked.

Bruce and Michael -- I agree that being very inefficient will not be rewarded, but there are wide ranges of efficiency. A highly efficient lawyer may not be able to work fast over a short period of time but then get very fatigued and need down time. Moreover, there are clients who want very detailed accountings of time on bills, down to 10 minute intervals. This results in a ton of time being spent on accounting for what one is doing every second of the day. A lot of this is simply made-up after the fact, as I've heard plenty of stories of people constructing their billing sheets at the end of the day or even after days at a time.

"This results in a ton of time being spent on accounting for what one is doing every second of the day." Agreed -- that's why I didn't challenge #1. And entering time is itself non-billable, of course.

Frank,
While a cut of the deal might be nice for transactional lawyers, there are at least some complicating factors: under the IRS's current Circular 230 rules, there are some serious adverse consequences to lawyers, accountants, and others who practice in front of the IRS (and their firms) if they are paid any proportion of the client's tax savings from a transaction.

As I've noted in a recent posting [http://blogs.law.harvard.edu/ethicalesq/2007/07/26/presumed-ignorant-scott-turow-on-the-billable-hour/]please count me among the observers who predicts no improvement in lawyer ethics, work balance, or client satisfaction, if the billing system is changed without clearly reducing the amount of fees that each lawyer is expected to generate every year. Each billing system has its own ethical traps and inefficiencies. For example, it may be efficient to do as little as possible under a flat fee, but the result is certainly not always competent or diligent client service, nor a fair fee. Likewise, taking a third of every personal injury recovery may avoid the temptation to work unnecessary hours, but it doesn't remove the temptation to work too few -- and, it certainly is no guarantee that the fee generated has any connection to the value added by the lawyer to the client's case, or to the risk taken that might justify a fee larger than a reasonable hourly amount.

Also, I wonder whether those who talk about lawyers taking "a cut of the deal" realize they are effectively making themselves partners in the client's venture (while greatly limiting their liability for losses, of course). We lawyers need to remember that we are in reality educated servants of our clients -- independent-contract employees who deserve to be paid for our skills and our time. If that role is too humble for you, perhaps being part of a learned profession is not a good fit -- and becoming a real entrepeneur, with its marketplace risks and rewards, is a better choice.

Any billing system will be fair to the client, if the lawyer is honest, diligent, competent, and focused on putting the client's interest above his or her own financial interests, and those of the firm. No billing system will be fair to the client if it is part of an office ethos that demands enormous profits and huge salaries, with correspondingly warped priorities and work-life balance.

Readers may be interested in taking a look at the following law firm, which has apparently adopted a fixed price billing model: http://exemplarlaw.com/. (No personal connection to the firm; I simply discovered it a few years ago and bookmarked the site.)

This is similar to other discussions among my professional colleagues in the world of accounting and especially the views of Verasage.

We're of the view that billing by the hour is a bankrupt model because it is based on the Marxist idea of labor cost and not on value delivered. I believe clients want value and don't care for cost, with all the problems the author outlines.

And let's not forget the societal impact of this type of system. Any system that emphasizes time spent rather than result obtained will have a negative effect on women - as they are the ones who need to take the time off to have babies, and are usually the primary caretakers of children and aging parents. If talented women are punished for having a life and if there is no recognition and accomodation of the societal roles they play -- they will leave for other work environments. Given the number of women graduating from law schools, this is not something law firms can ignore. No wonder so many law firms are left with maladjusted "sharks" (see posting above...)

I'm a little confused on the Marxist theory because the assumption seems wrong. It assumes that all clients pay the same for each billable hour. They don't. Some lawyers charge $125/hr, while some charge $500+/hr.

At the point where the efficiency and talent outpaces the drudge, then the $500/hr lawyer attracts clients.

Also, I'm a little concerned about the comment about women lawyers - as that asusmes that all want to have babies or should be sterilized. Was Johnson Controls decided wrongly? Let them make their own choices... sheesh....

I'm a little confused on the Marxist theory because the assumption seems wrong. It assumes that all clients pay the same for each billable hour. They don't. Some lawyers charge $125/hr, while some charge $500+/hr.

At the point where the efficiency and talent outpaces the drudge, then the $500/hr lawyer attracts clients.

Also, I'm a little concerned about the comment about women lawyers - as that asusmes that all want to have babies or should be sterilized. Was Johnson Controls decided wrongly? Let them make their own choices... sheesh....